Legal tender

Overview

Legal tender is a form of money that the law recognises as valid for the discharge of a monetary debt in a jurisdiction. What constitutes legal tender varies between jurisdictions. However, legal-tender status generally does not require a seller to accept a particular form of payment before entering into a transaction. Businesses may therefore set the terms on which they accept payment, including electronic payment methods, foreign currencies or other means of payment where permitted by law. In most countries, coins and banknotes are legal tender, whereas cheques, credit cards and other non-cash payment methods are generally not. Some jurisdictions recognise a foreign currency as legal tender, either alongside or instead of a domestic currency. Governments may also withdraw legal-tender status from a currency through demonetisation or introduce a new legal tender to replace an existing one.

Etymology

The term legal tender is from Middle French tendre (verb form), meaning to offer. The Latin root is tendere (to stretch out), and the sense of tender as an offer is related to the etymology of the English word extend (to hold outward).

Withdrawal and replacement

Demonetization is the act of stripping a currency unit of its status as legal tender. It occurs whenever there is a change of national currency: the current form or forms of money is or are pulled from circulation and retired, often to be replaced with new notes or coins. Sometimes, a country completely replaces the old currency with new currency. The opposite of demonetization is remonetization, in which a form of payment is restored as legal tender. Coins and banknotes may cease to be legal tender if new notes of the same currency replace them or if a new currency is introduced replacing the former one. Examples of this are:

During the Nazi occupation of the Netherlands, 500- and 1000-guilder banknotes were demonetized, and after liberation, 100-guilder notes were also demonetized. Anne Frank in her diary entry on 19 March 1943 notes:Thousand-guilder notes are being declared invalid. That'll be a blow to the black marketeers and others like them, but even more to people in hiding and anyone else with money that can't be accounted for. To turn in a thousand-guilder bill, you have to be able to state how you came by it and provide proof. They can still be used to pay taxes, but only until next week. The five-hundred notes will lapse at the same time. Gies & Co. still had some unaccounted-for thousand-guilder bills, which they used to pay their estimated taxes for the coming years, so everything seems to be above board.Piet Lieftinck, the first post-Nazi occupation Minister of Finance, demonetized the 100-guilder notes in July 1945 as a measure intended to target war profiteers. On 6 October 1944, the recently repatriated Belgian government demonetized banknotes greater than 100 francs. People having 100 francs were allowed to exchange up to 2000 francs per household for new banknotes. Banks added withdrawal limits and current accounts were frozen. The Government of Ceylon passed the Prevention of the Avoidance of Income Tax Act on 26 October 1970, demonetized all currency notes of the denominations of Rupees 50 and 100, bearing a date prior to that of the demonetization. The United Kingdom adopted decimal currency in place of pounds, shillings and pence in 1971. Banknotes remained unchanged (except for the replacement of the 10 shilling note by the 50 pence coin). In 1968 and 1969 decimal coins which had precise equivalent values in the old currency (5p, 10p, 50p – 1, 2, and 10 shillings respectively) were introduced, while decimal coins with no precise equivalent (½p, 1p, 2p – equal to 1.2d (old pence), 2.4d and 4.8d respectively) were introduced on 15 February 1971. The smallest and largest non-decimal circulating coins, the half penny and half crown, were withdrawn in 1969, and the other non-decimal coins with no precise equivalent in the new currency (1d, 3d) were withdrawn later in 1971. Non-decimal coins with precise decimal equivalents (6d ( = 2½p), 1 and 2 shillings) remained legal tender either until the coins no longer circulated (1980 in the case of the 6d), or the equivalent decimal coins were reduced in size in the early 1990s. The London Underground coin-operated machines were used until the next generation appeared in the 1980s. Old coins returned to the Royal Mint through the UK banking system will be redeemed by exchanging them for legal tender currency with no time limits; however, coins issued before 1947 have a higher value for their silver content than for their monetary value. As part of their economic warfare operations during the Angolan Civil War, South African intelligence produced and disseminated counterfeit Angolan currency. In late 1980, counterfeit 100 Kwanza notes began to appear in Huambo and spread to other large cities in the northwest. On February 4, 1981 at a commemoration of 20 years of struggle by the MPLA, Jose Eduardo dos Santos announced that the old notes would be withdrawn and exchanged with new notes. The old notes featured the previous president, Agostinho Neto, while the new notes showed him and dos Santos in profile, which became a standard feature on other designations. The successor states of the Soviet Union replacing the Soviet ruble in the 1990s. The successor states of Yugoslavia replacing the Yugoslav dinar in the 1990s and 2000s. Currencies used in the Eurozone which were replaced by the euro were then not legal tender, but all banknotes and coins were redeemable for euros for a minimum of 10 years (for certain notes and coins, there is no time limit). India demonetized its 500 and 1000 rupee notes on 8 November 2016. This action affected 86 per cent of all cash in circulation. The demonetization action was intended to curb counterfeit notes and black money, the hoarding of unaccounted cash, and sponsorship of terrorism, but also led to long queues from bank runs, leaving more than 30 people dead. The old notes were replaced by new 500 and 2000 rupee notes. The Philippines has ceased 2 peso and 50 centavo coins of the Flora and Fauna Series in 2000, due to over minting of the coins of the BSP Series that has not included the 2 peso and 50 centavo coins of that series. Individual coins or banknotes can be demonetized and cease to be legal tender (for example, the pre-decimal United Kingdom farthing or the Bank of England 1 pound note), but the Bank of England does redeem all Bank of England banknotes by exchanging them for legal tender currency at its counters in London (or by post) regardless of how old they are. Banknotes issued by retail banks in the UK (Scotland and Northern Ireland) are not legal tender, but one of the criteria for legal protection under the Forgery and Counterfeiting Act is that banknotes must be payable on demand, therefore withdrawn notes remain a liability of the issuing bank without any time limits. In the case of the euro, coins and banknotes of former national currencies were in some cases considered legal tender from 1 January 1999 until various dates in 2002. Most countries continued to exchange pre-euro notes and coins for a period of time; as of 2025, Ireland, Germany, Austria, Belgium, Luxembourg, and the Netherlands continue to exchange some or all of their coins and banknotes withdrawn in 2002. Legally, those coins and banknotes were considered non-decimal sub-divisions of the euro. When the so-called "Swiss" dinar ceased to be legal tender in Iraq, it still circulated in the northern Kurdish regions. Despite lacking government backing, it had a stable market value for more than a decade. This is also true of the paper money issued by the Confederate States of America during the American Civil War. The Confederate currency became worthless by its own terms after the war, since it could only be redeemed a stated number of years after a peace treaty was signed between the Confederacy and the United States (which never happened, as the Confederacy was defeated and dissolved). During World War II the United States printed a series of Hawaii overprint notes as an emergency issue after the attack on Pearl Harbor. The intent of the overprints was to easily distinguish United States dollars captured by the Imperial Japanese Armed Forces in the event of an invasion of Hawaii (which never happened) and render the notes worthless via demonetization. Demonetization is currently prohibited in the United States, and the Coinage Act of 1965 applies to all US coins and currency regardless of age. The closest historical equivalent in the US, other than Confederate money, was from 1933 to 1974, when the government banned most private ownership of gold bullion, including gold coins held for non-numismatic purposes. Now, however, even surviving pre-1933 gold coins are legal tender under the 1964 act.

Withdrawal from circulation

Currency may be withdrawn from circulation but remain legal tender. They may be actively removed from circulation, or their production may simply be ceased. In 1989, the Bank of Canada withdrew the $1 banknote. It retained its status of legal tender, however its production was halted, and the $1 coin was set to replace it. On September 29, 2000, the production of the $1,000 banknote was suspended, and these notes were actively pulled out of circulation for destruction. As of January 1, 2021, the $1, $2, $25, $500, and $1000 withdrawn banknotes have been demonetized and are no longer legal tender. The Bank of Canada continues to accept them at face value despite their lack of legal tender status. United States banknotes issued at any date remain legal tender even after they are withdrawn from circulation. Bank of England notes that are withdrawn from circulation generally cease to be legal tender but remain redeemable for current currency at the Bank of England itself or by post. All paper and polymer issues of New Zealand banknotes issued from 1967 onwards (and 1- and 2-dollar notes until 1993) are still legal tender; however, 1-, 2- and 5-cent coins are no longer used in New Zealand.

Cashless society

A cashless society is an economic state whereby financial transactions are not conducted with money in the form of physical banknotes or coins. Cashless societies have existed, based on barter and other methods of exchange. In modern usage, the term usually refers to financial transactions conducted by transfer of digital information (usually an electronic representation of money) between the transacting parties.

Commemorative issues

Sometimes currency issues such as commemorative coins or transfer bills may be issued that are not intended for public circulation but are nonetheless legal tender. An example of such currency is Maundy money. Some currency issuers, particularly the Scottish banks, issue special commemorative banknotes which are intended for ordinary circulation (though no Scottish banknotes nor notes from Northern Ireland are legal tender in the United Kingdom). As well, some standard coins are minted on higher-quality dies as uncirculated versions of the coin, for collectors to purchase at a premium; these coins are nevertheless legal tender. Some countries issue precious-metal coins which have a currency value indicated on them which is far below the value of the metal the coin contains: these coins are known as non-circulating legal tender or NCLT.

Australia

The Australian dollar, comprising notes and coins, is legal tender in Australia. Australian notes are legal tender by virtue of the Reserve Bank Act 1959 (Cth) s 36(1), without an amount limit. The Currency Act 1965 (Cth) similarly provides that Australian coins intended for general circulation are also legal tender, but only for the following amounts:

Not exceeding 20c if 1c and/or 2c coins are offered, Not exceeding $5 if any of 5c, 10c, 20c and 50c coins are offered, Not exceeding 10 times the face value if the coins offered are greater than 50c up to and including $10, To any value for coins of other denominations above $10. The 1c and 2c coins were withdrawn from circulation from February 1992 but remain legal tender. Although the Reserve Bank Act 1959 and the Currency Act 1965 establishes that Australian banknotes and coins have legal tender status, Australian banknotes and coins do not necessarily have to be used in transactions and refusal to accept payment in legal tender is not unlawful. A provider of goods or services is at liberty to set the commercial terms upon which payment will take place before the contract for supply of the goods or services is entered into. If a provider of goods or services specifies other means of payment prior to the contract, then there is usually no obligation for legal tender to be accepted as payment. This is the case even when an existing debt is involved. However, refusal to accept legal tender in payment of an existing debt, where no other means of payment/settlement has been specified in advance, conceivably could have consequences in legal proceedings. Australia Post prohibits the sending of coins or banknotes, of any country, except via registered post.

History

In 1901, notes in circulation in Australia consisted of bank notes payable in gold coin and issued by the trading banks, and Queensland Treasury notes. Bank notes circulated in all states except Queensland, but were not legal tender except for a brief period in 1893 in New South Wales. There were, however, some restrictions on their issue and other provisions for the protection of the public. Queensland Treasury notes were issued by the Queensland Government and were legal tender in that state. Notes of both categories continued in circulation until 1910, when the Commonwealth Parliament passed the Australian Notes Act 1910 and the Bank Notes Tax Act 1910. The Australian Notes Act 1910 prohibited the circulation of state notes as money, and the Bank Notes Tax Act 1910 imposed a tax of 10%, per annum, on "all bank notes issued or re-issued by any bank in the Commonwealth after the commencement of this Act, and not redeemed". These Acts effectively put an end to the issue of notes by the trading banks and the Queensland Treasury. The Reserve Bank Act 1959 expressly prohibits persons and states from issuing "a bill or note for the payment of money payable to bearer on demand and intended for circulation".

Canada

In general, Canadian dollar banknotes issued by the Bank of Canada and coins issued under the authority of the Royal Canadian Mint Act are legal tender in Canada. However, commercial transactions may legally be settled in any manner agreed by the parties involved with the transactions. For example, convenience stores may refuse $100 bank notes if they feel that would put them at risk of being counterfeit victims; however, official policy suggests that the retailers should evaluate the impact of that approach. In the case that no mutually acceptable form of payment can be found for the tender, the parties involved should seek legal advice. Under the Currency Act, there are limits to the value of a transaction for which only coins are used. A payment in coins is a legal tender for no more than the following amounts for the following denominations of coins:

$40 if the denomination is $2 to $10, $25 if the denomination is $1, $10 if the denomination is 10c to $1, $5 if the denomination is 5c, and 25c if the denomination is 1c. In the case of coins of a denomination greater than $10, a payment is a legal tender for no more than the value of a single coin of that denomination. Where more than one amount is payable by one person to another on the same day under one or more obligations, the total of those amounts is deemed to be one amount due and payable on that day.

China

In the People's Republic of China, the official currency renminbi serves as the unlimited legal tender for all transactions. It is illegal for any public institution or individual to refuse the currency when settling public or private debts.

El Salvador

In 2001, El Salvador's government ceased issuing the Salvadoran colón and began using the US dollar as the country's primary legal tender currency. Although the colón has remained legal tender, it is no longer in circulation. In June 2021, El Salvador's Legislative Assembly and president Nayib Bukele passed the Bitcoin Law, classifying bitcoin as legal tender. Under the law, both bitcoin and the US dollar were legal tender. In February 2025, El Salvador's government removed bitcoin's legal tender status, following pressure from the International Monetary Fund.

Eurozone

Euro coins and banknotes became legal tender in most countries of the Eurozone on 1 January 2002. Although one side of the coins is used for different national marks for each country, all coins and all banknotes are legal tender throughout the eurozone. Although some eurozone countries do not put 1 cent and 2 cent coins into general circulation (prices in those countries are by general understanding always rounded to whole multiples of 5 cent), 1 cent and 2 cent coins from other eurozone countries remain legal tender in those countries. Council Regulation (EC) No 974/98 limits the number of coins that can be offered for payment to fifty. Governments that issue the coins must establish the euro as the only legal tender. Due to variations on the legislative meaning of legal tender in various member states and the ability of contract law to overrule the status of legal tender, it is possible for merchants to choose to refuse to accept euro banknotes and coins within specific countries within the Eurozone. For example, the Netherlands, Italy, Belgium, Finland, and Ireland have de jure or de facto removed the use of 1 cent and 2 cent coins and adopted cash rounding to the nearest multiple of 5 cents. National laws may also impose restrictions as to maximal amounts that can be settled by coins or notes. Kosovo and Montenegro, which are not members of the European Union and the Eurozone and do not have a formal monetary agreement with the EU, unilaterally adopted the euro in 2002 as their de facto domestic currency to ensure monetary stability and to continue to avoid the high inflation seen in preceding decades: this means that the euro is not a legal tender there, but it is treated as such by the government and the people.